grow smart session ii: corporate governance jeffery k. mitchell blacksburg, virginia office
TRANSCRIPT
GROW SMARTSESSION II: CORPORATE GOVERNANCE
Jeffery K. MitchellBlacksburg, Virginia Office
The Grow Smart Series
5-part series Practical Strategies
• Raising Capital• Corporate Governance• Employee Strategies• Employee Incentives• Protecting IP
Sponsoring Organizations
Why is corporate governance important?
“[O]ur most recent experiences with corporate malfeasance suggest that governance has strayed from the way we think it is supposed to work. By law, shareholders own corporations, and corporate managers ideally should be working on behalf
of shareholders to allocate business resources to their optimum use.”
Former Chairman of The Federal Reserve BoardAlan GreenspanMay 8, 2003
Corporate Governance Defined
Internal systems that establish the relationships between the corporation and its stakeholders• Shareholders• Management• Board of Directors• Employees• Creditors• Vendors• Government/Regulators
Policies, statutes, rules, practices Values and ethics
Bad Corporate Governance
Corporate Governance - Sample
Corporate governance at Microsoft serves several purposes:• To establish . . management accountability . . . • To provide structure…to monitor performance…• To strengthen ..our culture of business integrity…• To encourage the efficient use of resources, and• To require accountability for the stewardship of those
resources.– www.microsoft.com
Why Should Private Companies Care?
Piercing the corporate veil• Personal liability
Clarity and accountability• Better results• Avoid problems• Stronger market reputation
Piercing The Corporate Veil
Two theories that enable third parties holdings owners responsible for corporate obligations• Alter Ego Theory
– Distinction between corporation and shareholders
• Instrumentality Theory– Use of corporation for personal gain
Fact basis determination
Piercing the Corporate Veil - Examples
Depositing corporate funds in personal account
Executing contracts in personal name No corporate formalities – stock purchase,
annual meetings, bylaws, minute book Fraud
Corporate Governance Matters for Private Companies Too . . .
Public company federal laws do not apply to private companies• Sarbanes-Oxley• Areas of concern the same
Reduce risk of fraud, embezzlement Greater market reputation
• Investors• Banks
Process predictability
For A Stronger Company . . .
Shareholders delegate authority to the Board of Directors which delegates to the management
Separation of ownership and control Clear expectations Responsibility and Accountability Exit Strategy Private Equity Market D&O Insurance
Corporate Governance Controls
Internal Control Factors• Board of Directors• Separation of duties• Separate individuals• Checks and balances
External Influencers• Statutes • Audits (Financial, Operations)• Competition/Market• Agreements
– Shareholders Agreement– Financing Agreements– Customer/Strategic Partner Agreements
Role of Board of Directors
Effective governance over the corporation’s affairs Balance diverse constituencies Oversee management Long-term strategy development President/CEO evaluation Appropriate committees (audit, compensation)
Sample Director Qualifications
Exhibited behavior that indicates a …highest ethical standards . . .
Business, governmental, non-profit or professional experience… policy making…operational level…
Special skills, expertise and background . . .complement the existing directors . ..
Financial expertise … Will effectively…take into account…legitimate interests and
concerns of all of the …stakeholders Will challenge management… Able to devote sufficient time and energy.
– Citigroup Inc Corporate Governance Guidelines (as of May 27, 2008)
The VA Business Judgment Rule
General standards of conduct for director. A. A director shall discharge his duties as a director, including his duties as a member of a
committee, in accordance with his good faith business judgment of the best interests of the corporation.
B. Unless he has knowledge or information concerning the matter in question that makes reliance unwarranted, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by:
1. One or more officers or employees of the corporation whom the director believes, in good faith, to be reliable and competent in the matters presented;
2. Legal counsel, public accountants, or other persons as to matters the director believes, in good faith, are within the person's professional or expert competence; or
3. A committee of the board of directors of which he is not a member if the director believes, in good faith, that the committee merits confidence.
C. A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section.
D. A person alleging a violation of this section has the burden of proving the violation. -- §13.1-690 Virginia Code
Conflicts of Interest
A conflict of interests transaction is a transaction with the corporation in which a director of the corporation has an interest that precludes the director from being a disinterested director.
A conflict of interests transaction is not voidable by the corporation solely because of the director's interest in the transaction if any one of the following is true:
1. The material facts …. were disclosed or known to the board of directors . . . and the board of directors . . Approved . . the transaction;
2. The material facts of the transaction and the director's interest were disclosed to the shareholders . . . and they authorized . . . ; or
3. The transaction was fair to the corporation. -- §13.1-691 Virginia Code
Governance Document Review
Articles of Incorporation• Complete and Comprehensive• Accurate to current situation
Bylaws• Shareholder Meetings• Policies and procedures for Board of Directors• Established processes
– Election– Reporting– Information
• Annual meeting format Shareholders’ Agreement Information Rights Agreement
Corporate Minutes
Permanent, official record of actions of shareholders, directors or committees
Prima Facie evidence of the facts they set forth Statutory requirement Avoid future misunderstandings
• WHEREAS (why are we acting, what is the “background”)• RESOLVED (the action taken)
– Approve– Adopt– Ratify
Executing Agreements
Signature blockMY COMPANY, INC.
By:________________Name, Title
Corporate resolutions • Major transactions• Evidence of corporate action
Action Steps For A Private Company
Create/Review Board of Directors • Board of Advisors
Have written policies/agreements• Bylaws• Shareholder Agreements• Information Rights Agreements
Consider an audit• Establish sound financial procedures
Establish and re-enforce a culture of honesty• Adopt a corporate statement on ethics
Create accountability
Corporate Governance … A Check-Up
Organizational standing Organizational document review Internal audit review Management responsibilities review Board of Directors understanding/training Cash management/operations Management Ethics policy
Conclusion . . .
Watch for future events• March 24: Smart Employee Strategies• April 7: Employee Incentive Plans• April 21: Ten Strategies for Protecting Your IP
Email contact for LeClairRyan:• Jeff Mitchell [email protected]
Email contact for SWVTC:• Shannon Blevins [email protected] • Esther Bolling [email protected]
Questions & Answers
Thank You!